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HNW Lending Update On Its Loans During COVID-19
I want to write up my findings from looking at HNW Lending's most recent data submission to us. This included extra information at our request to highlight any impact on loans due to COVID-19.
A quick summary of what HNW Lending does
HNW Lending* does bridging lending, which are short-term property loans. Often called a “bridge” or bridges for short.
More specifically, HNW Lending focuses on cash-poor, asset-rich borrowers. Bridging property valuations are also sometimes not as watertight as other property lending, since speed and ease for the borrower can sometimes be a big selling point.
To that end, this kind of bridging lending earns higher interest rates, as it comes with a higher risk of missed payments – along with all the legal costs of chasing those debts.
In HNW Lending's case, its lending rates on its loans aren't high on each and every loan, because it reduces the risks considerably through other means. It has a good number of loans that are well under 50% of the property valuations. HNW Lending’s directors take a first loss of at least 10% if you use auto-lend, which currently automatically spreads your money across over 40 property loans. This first loss is millions of pounds of commitment of personal funds.
How much bad debt is there at HNW Lending?
This type of bridging lending typically comes with a very high number of loans that turn bad – at least initially. However, when it's done well, most of the loans that turn bad should ultimately be recovered in full, including interest.
HNW Lending up to today has fit into that mould. Typically, in HNW Lending's six-year history, at any one point in time, 15% to 20% of loans have been bad debts in the process of legal action to get recovery of the debt – plus outstanding interest. In addition, nearly as many loans have been late for repayment.
Is that for real?
Those bad debt and late loan statistics might seem quite shocking, especially if you've been lending where few loans, if any, go bad. But it is typical of the kind of bridging lending that HNW Lending does.
It's what happens next that is especially important.
Here's an unhappy example from another bridging P2P lending company that in many key ways was distinctly different to HNW Lending: FundingSecure.
Anyone who was lending through FundingSecure in the last 6-12 months of its doomed existence will have learned that property valuations need to be both solid and recent. Or, failing that, at least a great deal higher than the amount borrowed.
In addition, rapid action to recover bad debts is absolutely essential for these kinds of loans to have a high chance of recovery. FundingSecure's key people certainly seemed, in contrast, to bury their heads in the sand.
How does HNW Lending do on bad-debt recoveries?
HNW Lending*, in contrast, has an excellent record in recoveries so far, which is essential for this kind of lending.
It begins with its extremely quick acknowledgement of problems. Within weeks of a borrower being unable to meet its obligations, HNW Lending is instructing solicitors to take action.
Just a handful of its nearly 400 loans have had some of the debt written off. The amounts were small compared to the loan book, with the biggest write-off being just 25%. The majority of bad debts have historically been recovered in full, which is partly why it continues to have the top 4thWay PLUS Rating of 3/3 “Exceptional”.
COVID-19 update for HNW Lending
At present, the proportion of loans that are bad debts is within the usual expected range. But an additional 10% of HNW Lending's outstanding loans have had either partial or full payment holidays due to COVID-19.
Those additional issues would be alarming in other forms of lending – even some other forms of bridging lending – but here they're currently well within our expectations.
During severe recessions, the number of bridging loans of this type that turn into bad debts can easily double. Here, the going is not as rough as that, with an extra half or two-thirds suffering timely-payment issues, but still not being classed as bad debts yet.
This is probably in part because the impact of the pandemic on these borrowers and loans is currently expected to be short-lived compared to the bricks-and-mortar these loans are secured on. It’s also in part because it's too early; some of these debts will certainly turn officially bad, but it will take a few more months.
With HNW Lending's record of rapidly calling bad debts by their proper name and pursuing them through all legal means, I feel comfortable that it's accurately reporting the condition of these loans.
At present I see no reason to fear that the average lender using HNW Lending who has taken the trouble to spread the risks is in any danger. The risks are still likely to be well covered by the interest and security. (That doesn't override the basic good sense of spreading your money across 6-12 different P2P lending accounts.) It will be a long time getting your money on a lot of these bad debts, but you'll earn interest while you wait. That's where bridges often lead to when they're built for asset-rich, cash-poor borrowers.
Read the HNW Lending Review.
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